Today's markets: China’s big stimulus sends shares up

The big news came overnight, China and Hong Kong stocks soaring 4-5 per cent after the country’s central bank announced new easing measures. The People's Bank of China cut the reverse repo rate by 50bps and the seven-day repo rate by 0.2 percentage points. It also signalled further cuts, reduced the deposit on second mortgages and said China will set up a swap facility. It was the broadest and deepest bit of simultaneous easing in a decade. Crude oil rallied, as did gold, hitting a new high overnight. Note also that several Fed officials on the wires Monday left the door open to further jumbo rate cuts this year… don’t fight the Fed, especially if Beijing is following suit.

The boost for China and Asian equities was clear enough and we have a positive open for Europe early Tuesday with the Cac 40 up 1.2 per cent, Dax up 0.8 per cent and FTSE 100 rising 0.45 per cent. Miners led the gains in London, with Anglo American up about 6 per cent and others tracking around 4 per cent higher on the China story. Wall Street put in another post-Fed relief rally session, the S&P 500 finishing at a fresh record high. JPM suggests investors "remain tactically bullish and think macro setup is supportive of rally into the year end; however, it’s unlikely to be a straight line...the presidential election is the largest source of uncertainty remaining, but we are inclined to buy every dip".  

The Reserve Bank of Australia was unchanged and said “while headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high.” After rising to its strongest against the US dollar since Christmas, the Aussie was sold a bit on the news – although the hawkish bias was largely retained, the central bank said it did not discuss hiking rates. Odds still favour a cut in the coming months once the quarterly inflation report comes out at the end of next month. 

It’s worth looking a bit more at the PMI figures from yesterday, particularly Germany. They showed the fourth straight month of job losses at the fastest rate in more than 15 years; new businesses down at the quickest rate in a year; and considerable softening of cost pressures, including output prices at a 44-month low. Then in France, the post-Olympic hangover in services was sharper than many had expected – the PMI fell to 48.3 from 55 during the games. 

All in all, the flash PMI for September showed average prices charged for goods and services in the euro area rising at the slowest rate since February 2021. The decline pushes the PMI’s selling price index to a level below that consistent with the European Central Bank's 2 per cent target. In other words, why wait to cut more? And this morning we got the biggest negative surprise in the German IFO current business sentiment since Covid.

By Neil Wilson, chief market analyst at Finalto